Ask Colin

Could you please explain what is meant by a stock's beta and whether it is better to be above or below 1.0?

Beta is a calculation, based on the past, of the volatility of the price of a share compared to the volatility of the total market. So, if a share tends to rise or fall by the same percentage as the market, it would have a beta of 1.0. It the share tends to rise or fall by 7% while the market rises or falls by 4%, the beta ratio would be 7:4 or 1.75. If the share tends to rise or fall by 3%, while the market tends to rise and fall by 6%, the beta ratio is 3:6 or 0.5.

So, what the beta tells you is that if beta is above 1.0, the share tends to be more volatile than the market. If the beta is less than 1.0, the share tends to be less volatile than the market.

Whether it is better to be above or below 1.0 all depends on what you are trying to do. A conservative and defensive portfolio that was focused on capital preservation might favour stocks with a beta less than 1.0. However, that would be sacrificing potential return for safety.

On the other hand a trader, who is sacrificing safety for return, would favour shares with a beta greater than 1.0.

Of course, it is not a simple as this. A strategy based on beta might change over time as the market conditions change.

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